Market Microstructure How do derivatives trade?
In the cash market, the basic dynamic is that the issuer puts out paper, and people trade this paper. In contrast, in derivatives, there is no issuer. The net supply of all derivatives contracts is 0. For each long, there is an equal and opposite short. A contract is born when a long and a short meet on the market. There would be a clear contract cycle” which the exchange defines. For example, using quarterly contracts, we would have something like this: On Jan 1, four contracts start trading. The nearest contract expires on 31 Mar. On 31 Mar, this first contract ceases to exist, and the next (30 June) contract starts trading. In the case of options, the exchange additionally defines the strike prices of the options which are allowed to trade.
